Bulletin of the Institute for Western Affairs

IFDI and OFDI developments and policies

in Germany in the aftermath
of the 2008+ crisis
Marta Gtz
The

significant

declines

in

international

foreign

direct

investment (FDI) observed in the aftermath of the 2008+ crisis

and the accompanying ideological shifts in the role of the state
in the economy have both inspired research on FDI policies in
Europe at large and in Germany in particular. Whereas
significant crisis-induced adjustments were made in major fiscal
and monetary policies, little is known about the possible
modifications

to

policies

in

other

secondary

areas of

governmental activity such as foreign direct investment. FDI is

No. 208/2015
181215
Institute for Western Affairs
Pozna

regarded as being the most advanced form of international

capital flows. Whether in the form of Mergers and Acquisitions
(M&A) or Greenfield Projects, it is associated not only with pure
flows

of

funds but

technologies,

new

also

with

managerial

transfers of
solutions

and

know-how,
forms

of

organization. The IFDI and OFDI statistics retrieved from the

Eurostat and a comparison of pre-2008 and post-2008 figures
Editorial Board:
Radosaw Grodzki
Jacek Kubera
Piotr Kubiak
Krzysztof Malinowski

ISSN 2450-5080

reveal certain regularities in the magnitude of FDI change in the

EU. Analysis of scatter plots shows that the FDI flows of certain
countries clearly stand out even if no distinct trends can be
detected.

Changes in average FDI flows (2004-2008 vs. 2009-2013, inflows on axis X, outflows on
axis Y)

Own elaboration based on Eurostat, 2015

FDI stocks are made up of the flows accumulated over time abroad or in the
reporting economies.

Changes in FDI stocks from 2008 to 2012 (stocks in reporting economy on axis X, stocks
abroad on axis Y)

Own elaboration based on Eurostat, 2015

Bulletin of the Institute for Western Affairs www.iz.poznan.pl 2

The average value of inward FDI flows directed to Germany in the 2009-2013
period fell by 13% from 2004-2008. The average value of trans-border FDI outflows
originating in Germany in the above periods declined by 21%. Nevertheless, such
drops did not translate into lowering the accumulated FDI. In 2012, Germanys IFDI
stock rose by 16% on 2008 whereas German OFDI abroad increased by 37%.
Complementary information from the UNCTAD database confirms that the German
IFDI stock increased by 22% from before the crisis to 2012. The German OFDI stock
abroad climbed by 28% from 2007. As of 2013, the value of Germanys new inward
FDI remained at 67% below the pre-crisis year of 2007. In 2013, OFDI flows from
Germany were down by 66% compared to 2007 outflows.

FDI inflow and outflow in Germany (2000-2013, USD million)

Own elaboration based on UNCTAD, 2015

In 2009-2013, Germanys average market integration measured in terms of

FDI levels amounted to 1.56, down from the 2.06 level maintained in 2004-2008. With
minor exceptions in 2007 (4%), 2009 (2%) and 2010 (1%), Germany has kept its
spread between inward flows to GDP and the EUs average inward flows to GDP at the
constant level of 3%.
One can hypothetically assume that such (post)crisis fluctuations in FDI flows
can be explained by Germanys policies. While it is hard to imagine that Germanys
policies could have an impact without resorting to sophisticated econometric methods,
it seems worthwhile inquiring whether any policies were in fact modified. The FDI
policy is a very broad category encompassing a variety of measures, agencies, levels
and areas. It may be described as a general strategy as well as in terms of practical,
administrative issues. Besides specific regulations that foster or hamper FDI and
dedicated bodies tasked with dealing with foreign investors, various subnational

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provisions or complementary rules are in place that can also exert profound influence
on FDI. It seems worthwhile viewing the FDI policy against the background of the
governments overall activities. It was particularly post the 2008+ crisis that the ruling
parties of the EU member states found themselves forced to bring their economies into
alignment through a combination of the opposed approaches of carrots (rescue
packages) and sticks (unparalleled austerities). The German administrations in power
since the year 2000 have invariably accumulated deficits. Although a slight
improvement came around 2007, the crisis has left its mark on public finance also in
Germany widening the gap between revenues and spending. Although revenues rose
by 18% from 2007 to 2014, they were nevertheless outperformed by spending which
increased even more sharply by 21%. For a complete picture of the trends followed by
the governments general revenues and expenditures, one needs to examine deficit
and debt levels against the allowed thresholds. In 2013, Germany reported a balanced
budget with revenues equalling expenditures. Yet, its debt of 78.1% of the GDP
exceeded the allowable threshold of 60%. The Global Competitiveness Report 20142015 ranks Germanys public institutions as the 7th best across the EU with a score
of 5.2 points. In the category of government efficiency, Germany scored 4.5 elevating
its ranking to 7th best among all EU member states.
The most basic classification of FDI policies distinguishes between OFDI and
IFDI as well as hostile and friendly approaches to FDI. Given the lack of a reliable
single source of FDI policies worldwide, a number of indicators stored in the
repositories of international organizations have been selected on the basis of a review
of relevant databases. These may be seen as the best possible substitutes for genuine
FDI polices. In particular, reference may be made to (1) the OECDs Investment
Regulatory Restrictiveness Index (IRR); (2) the Reform Responsiveness Index (RRI);
(3) the existing Bilateral Investment Treaties (BITs) provided by the EU and UNCTAD;
(4) claims lodged under Investment State Dispute Settlement procedures (ISDS)
reported by UNCTAD; (5) the Doing Business ranking of the World Bank; (6) statistics
on the number of OFDI support centres provided by the EU Commission; (7) the
corporate income tax rates published by the US-based Tax Foundation; (8) the
attractiveness ranking provided in the Global Competitiveness Report of the World
Economic Forum; (9) the Index of Economic Freedom an annual guide published by
The Wall Street Journal and The Heritage Foundation and (10) indicators on
discriminatory measures that are harmful to foreign commercial interests, as reported
by the Global Trade Alert. The above provide insights into the progress achieved in

Bulletin of the Institute for Western Affairs www.iz.poznan.pl 4

ongoing reforms, the degree of openness to the international community and the level
of compliance with existing anti-discriminatory laws.
Germany has been mentioned twice by the Global Trade Alert in the context
of having launched measures that are harmful to investment. One such measure was
the nationalisation of the Hypo Real Estate bank and the expropriation of its minority
shareholders (as of October 13, 2009), the other: a review of foreign investments on
national security and public policy grounds (launched on April 18, 2009). The number
of ISDS cases filed against Germany has increased from 2 to 3 since 2008. Despite its
position as leader in terms of the number of BITs concluded (134), or perhaps as a
result of such a position, Germany has only concluded three new BITs since 2008. Its
investor regulatory restrictiveness index is low at 0.023. The GCR assess Germanys
FDI attractiveness at 4.8, which is above the EU average of 4.5. The overall picture
that emerges from the above assessments of Germanys inward FDI policy may
suggest that the countrys policy towards incoming investors remains friendly.
Germany is among the countries that lag behind the EU average in launching
the OCED recommended reforms (scoring 0.073 vs. the EUs 0.200). Its position in the
Doing Business ranking has also deteriorated from 2014 to 2015. Nevertheless,
Germanys score in the Heritage Freedom ranking has improved (+3.2). The official
number of Germanys OFDI support providers, i.e. 78, places the country at the very
head of the European Union. Germanys corporate income tax rate has been
fluctuating since 2007 and is currently above the EU average (at 2.95). Based on
changes in the basic indicators applied in its outward FDI policy, the OFDI policy being
pursued by Germany seems to be rather unfriendly.
Once a given countrys approaches to the IFDI and OFI have been combined,
they are suited for classification into one of the FDI policy models:
1. an open model both types of FDI are seen as making positive contributions to the
economy;
2. a closed model outbound and inbound investment is associated with losses to the
national economy;
3. a competitive model the state seeks to stimulate the rise of internationally
competitive domestic companies while restricting foreign investment which is perceived
as posing a threat to incumbent businesses;
4. a capital model the state clearly seeks to promote capital accumulation and
prevent the outflows of domestic businesses while attracting foreign investment.

Bulletin of the Institute for Western Affairs www.iz.poznan.pl 5

The above classification must be regarded with caution as a rudimentary

template for simple cross-country comparisons in the policy domain which remains
rather underexplored despite the profound changes taking place in this area. The
reason for this is that, firstly, in the aftermath of the crisis, economic patriotism,
nationalism and protectionism are being revived by politicians struggling with meagre
growth and even bleaker outlooks. Secondly, there is another related trend of growing
popularity of the idea of reindustrialization. Governments see the return of industry as a
chance to overcome negative declining trends in mature, aging economies at the risk
of secular stagnation. Thirdly, FDI policy following the Lisbon Treaty has been shifting
from the national to the supranational level and into the exclusive remit of the
European Commission. Fourthly, the crisis and the abuses that have been revealed,
including speculative capital flows, have prompted decision-makers to revisit the
current methodological approach to foreign investors which has lead to a more precise
definition of genuine FDI opposed to capital in transit. Fifthly, the TTIP, which is
currently under negotiation, appears to be a game changer for the FDI landscape.
While its full impact remains unclear, it is expected to be profound.
A combination of the evaluations of changes in Germanys IFDI and OFDI
policies suggests the country is pursuing a friendly IFDI and an unfriendly OFDI policy.
Therefore, in the proposed typology, Germany may be regarded as an example of the
capital model.

FDI policies pursued by Germany

Total of IFDI

Total of OFDI

Presumed

Presumed

Profile /

policy

policy

treatment of

treatment of

model

IFDI

OFDI

Friendly

Unfriendly

4 pos. 2 neg.

4 neg. 2 pos.

Capital model

Own proposal

The above classification of Germanys FDI policies draws on a set of variables

which, in most cases, have been fairly imperfect substitutes for FDI policy measures
selected in view of the limited availability of data and/or the sensitivity of the subject
matter. Hence, the findings must be treated with caution to prevent possible
misinterpretations. An interesting area for further research would be to find whether the

Bulletin of the Institute for Western Affairs www.iz.poznan.pl 6

identified approach is aligned with the policy evolution stipulated by Dunnings

Investment Development Path (IDP).

All views expressed in this article are exclusively those of its author.

This article presents selected outcomes of the Research Project The States role in Europes
(post)crisis economy policies towards foreign direct investment funded by the National
Science Centre by decision DEC-2014/13/B/HS4/00165 and presented during the conference
Germany in the modern world. The economic aspect organised by Institute for Western Affairs
and Konrad Adenauer Stiftung on 2nd December 2015.

Marta Gtz is an economist at the Pozna Institute for Western Affairs.

Bulletin of the Institute for Western Affairs www.iz.poznan.pl 7